Dealmaker: Lessons of a 1970s Bailout Still Hold

Sitting in a Rockefeller Center office adorned with pictures of the Place de la Concorde and prints purchased in Paris, Felix Rohatyn glances at newspaper reports on riots across France.

The Lazard dealmaker's face registers concern at the violent protests fueled by proposed changes to the nation's pension system.

"If you look at the pictures and what is going on in France — which is possibly contagious — you have to ask yourself, 'Where is this going?' " said Rohatyn, the former U.S. ambassador to France, now a special adviser to Lazard's chief executive, Kenneth Jacobs.

Later in the interview in his office, Rohatyn said, "I think the euro will be OK, and the Europeans will get themselves together in one form or another."

Rohatyn, 82, is intimately familiar with the tension that comes with managing a municipality's budget versus paying for services and social programs. After all, he was the point man for Gov. Hugh Carey of New York when New York City's budget ills threatened to create a financial meltdown. Rohatyn was part of a group that responded to the crisis by creating the state's Municipal Assistance Corp. He also chaired the agency for 18 years, and in his soon-to-be-published memoir he calls that work "the most rewarding experience of my professional life."

Most of the budget problems came to a head in the spring of 1975, when the city could not readily roll over its short-term debt. The MAC, which was shut down two years ago, helped the city secure much-needed financing.

"Felix was responsible for the plan which saved the city of New York," former Mayor Edward Koch said in an interview with Investment Dealers' Digest. "Hugh Carey was most important as the governor of the state. He saved the city and the state, and … at the head of the team was Felix."

Decades after New York City's financial crisis, Koch and Rohatyn stay in touch. Koch has invited Rohatyn to serve as a trustee for New York Uprising, a coalition of former state and city leaders that aims to change, among other things, how the state balances its budget.

Rohatyn's memoir of his life as an investment banker, "Dealings: A Political and Financial Life," is scheduled for release Nov. 2. The book tracks his career from his time as a junior Lazard dealmaker in the late 1940s to his days as one of the principals behind the MAC and his work on landmark transactions such as Kohlberg Kravis Roberts' buyout of RJR Nabisco.

Harvey Miller, now a partner specializing in restructurings with the law firm Weil Gotshal & Manges, recalled a late night in the mid-1970s at the mayor's Gracie Mansion residence when his firm was preparing papers that would have put New York City into receivership if its unions and its creditors did not reach a deal; the modern Chapter 9 bankruptcy law was not in effect at that time.

As Miller sees it, "MAC provided a basis to go public and borrow money. After MAC was put in place, the city's finances were closely supervised. For the first time the city had to adhere to defined budgets constrained by real revenues. Fiscal discipline was imposed. MAC enabled the city to establish financial credibility as it dug itself out of the financial morass that surfaced in 1975."

"MAC, with the backing of the governor, saved the city," Miller said. "Without MAC, it would have been impossible, and Felix was all over it. He was the guiding genius."

Today, though, the veteran dealmaker doubts that reaching across political parties and getting banking professionals to sit down with labor unions would be possible. "It's out of the question. You wouldn't even get into the front door," he said. "People would laugh at us if we actually said we are going to refinance the city, and we are going to have the unions and banks sit together on this."

Nevertheless, many state and local governments with hefty debt loads may just have to find these kinds of radical compromises, Rohatyn said. "It couldn't happen, but it will have to happen, because there is no alternative to some kind of refinancing that involves everybody. The suggested remedy is always similar: Let's get a group of people together and try to get everybody to sacrifice and keep this thing from getting completely out of hand."

When it comes to the budget problems of many local governments, "I think what's surprising is we knew this was coming," he said. "We knew it 15 years ago."

Rohatyn recalled borrowing elements of the MAC from Herbert Hoover's Reconstruction Finance Corp. "Hoover, when he was elected, didn't think he was going to create what was essentially a huge development bank, which was what the RFC was. I modeled MAC on the RFC, both in terms of its structure and in terms of what it was trying to do."

Years after the MAC was unveiled and its early success was evident, Rohatyn recalled that Francois Mitterrand, France's president, asked him to advise the country about its own finances.

"Mitterrand invited me, and he said, 'Listen, I want you to do for us what you did for New York City.' I said, 'I can't do that. You are not in New York City and I am. It is a different place,' " Rohatyn said. The "subtext of this was: 'How could you get a Trotskyite labor leader, which was Jack Bigel [an adviser to several New York unions], to sign on with you and the chairman of J.P. Morgan?' "

What if New York City had gone bankrupt? Rohatyn writes in his memoir that a court-supervised workout would have exacerbated the city's social troubles; wealthy residents could afford to move, but the poor would have been stuck with a city cutting back its spending on schools and infrastructure upkeep.

"The painful memory of the riots of 1968 was still strong. I worried … that resentment would lead enraged people into the streets," he wrote. "Bankruptcy would cause tens of thousands of layoffs, and an even greater exposure of the unions to the underfunding of their pensions." Rohatyn still worries about the social ills that come with economic upwelling. Specifically, he expressed concern about unemployment. The headlines put the U.S. jobless rate at 9.5%. More troubling, Rohatyn said, is a Labor Department figure that considers unemployed people and those who would like to work full time but are getting only part-time jobs. In September that figure was just over 17%. "The biggest risk the country is running today is the reaction to unemployment," Rohatyn said. "Since the Depression, we have not seen anything like this."